Firstly, to be in scope the entity will be any of the following – non cellular companies, ICCs and each cell for its own activities and PCCs for their own activities and of their cells.
Limited partnerships, LLPs, foundations and trusts are not in scope (although general partners and trustees may be caught).
Secondly, nine “relevant activities” were identified as causing concern: banking, insurance, fund management, financing and leasing (F&L), headquartering, shipping, distribution and service centres, intellectual property holding, and pure equity holding (PEH).
PEH companies hold controlling interests, have as their primary function the acquisition and holding of shares in other companies, and do not carry on any commercial activity.
Trustees will need to review the companies they hold to ascertain if they carry out a relevant activity. Of concern will be PEH companies although other companies may carry out relevant activities, especially shipping and F&L.
“Commercial activity” is widely construed but does not include charitable activities. Generally passive holding of other investment is not sufficient to become commercial activity, which means many trustee held companies will not be in scope.
The Guidance Notes state that a company holding a company as trustee will not be a PEH company unless also holding controlling interests in its own right.
An in-scope company must be directed and managed in the jurisdiction. This is distinct from established case law regarding “managed and controlled”. The board must meet in the jurisdiction, with a quorum physically present and with adequate frequency given the level of decision-making required. Strategic decisions must be taken at board meetings and reflected in minutes. Directors must have necessary knowledge and expertise: for corporate directors, knowledge and expertise applies to the individual officers actually performing the duties. Company records must be maintained in the jurisdiction.
An in-scope company, having regard to the level of the relevant activity, will need to have an adequate level of appropriately qualified employees, operating expenditure and physical presence, although outsourcing is permitted.
What is adequate or appropriate for each relevant entity will be dependent on the facts. Adequate means “enough or satisfactory for a particular purpose”. A company with minimal activity will be expected to have an annual meeting of the board held in the jurisdiction and records maintained to demonstrate adequacy of resources and expenditure. Given the nature of administration in the CDs this should be the case already.
Adequacy is not a one-size-fits-all; directors do not need to be resident in the jurisdiction; not all meetings must be in the jurisdiction.
Core income generating activity (CIGA) must be conducted in relation to the relevant activity which must be performed in the jurisdiction. When making decisions the majority of the decision makers must be present in the relevant jurisdiction.
It seems a twentieth century solution is required for a twenty-first century problem.